The Consumer Confidence Report Can Predict The Jobs Market Months Before The Jobs Report

If you want to know whether more businesses are going to be
hiring, you should probably be looking to the Conference Board
Consumer Confidence index, specifically its "present situation"
component.

In a new Liberty Street Economics blog post, New York Fed
researchers Jason Bram, Robert Rich and Joshua Abel show that the
business research firm's monthly survey has amazing predictive
powers for the employment data that comes from the Bureau of
Labor Statistics' widely-followed, monthly jobs report.

Each month, the Conference Board sends out a survey to 3,000
participants asking five questions about their perception of
current and expected business and employment conditions, plus one
on their own family incomes. It comes out the last Tuesday of
each month.

The New York Fed argues the index is so good that it can
basically predict the future.

According to the researchers, the index frequently knows what
will happen to the unemployment rate a couple months in
advance:

It’s hard to tell from inspecting the chart, but the highest
correlation (0.89) occurs at a two-month lead; that is,
the Present Situation Index is even more strongly
correlated with the unemployment rate two months into the future
than it is with the concurrent rate.

Once again, it’s very apparent that the two measures move closely
together, and again formal analysis reveals that the Present
Situation Index tends to foreshadow movements in employment by a
couple of months. In particular, twelve-month changes in
the index are most highly correlated with twelve-month job growth
four months into the future—the correlation is
0.83.

It also does sustained downturns:

Whenever the year-over-year change in this index has
turned negative by more than 15 points, the economy has entered
into a recession. The only time it was a bit late in
doing so was going into the 1982 recession, which is often
considered the second part of a “double-dip” after the 1980
recession. But in all four of the other post-1980 recessions,
this signal turned negative just before the
recession began.

So is there anything it can't do? Yes. The researchers note the
index basically asks yes or no questions, and can't capture
magnitude, and they note there appears to be a natural floor to
how low the reading can go.

But rare is the occurrence when the index begins to drift. Much
more often are the instances it has outmaneuvered pundits, having
successfully predicted the economy would hold up in the face of
the 1987 stock market crash, as well as the 1997 Asia crisis.

Unfortunately,
the Present Situation Index decreased to 70.7 from
73.6.